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Selling your home is not always smooth sailing. Sometimes, deals fall through, even after you and the buyer have a contract in place.
According to an October 2022 survey from the National Association of Realtors (NAR), about 7 percent of deals from the prior three months were terminated before reaching closing.
In other words, it’s rare for a buyer to back out of a deal, but it does happen. In this article, we’ll explain the most common reasons for a buyer to back out, and what you can do if it happens to you.
When can buyers back out of a home purchase?
Buyers can back out of a home purchase at several stages.
Backing out after signing the purchase and sale agreement
The homebuyer can back out of a purchase even after you’ve signed a purchase and sale agreement (PSA). The ramifications of a buyer walking away from the agreement vary based on how the contract was written and the reason for backing out.
For example, it’s perfectly legal for a buyer to back out of a real estate agreement if the contract included contingencies that were not met. Contingencies outline specific conditions that must be fulfilled in order for the deal to be closed. Typical contingencies are based around home appraisal, home inspection, sale of a prior home and financing — that is, getting approved for a mortgage.
“If the buyer pulls out because they did not get financing, but they have a finance contingency that’s still active, then the buyer is not in default, but rather used a contingency to void the contract,” says Will Rodgers, a Northern Virginia–based agent with the Alper Real Estate Group at Keller Williams. In this type of scenario, the buyer would typically get their earnest money deposit back.
However, if all contingencies have been met and the buyer still chooses to walk away from the deal, the seller would likely have contractual rights to keep the earnest money — the initial “good faith” deposit the buyer makes after signing the PSA, says Rick Albert, a broker associate with Lamerica Real Estate in Los Angeles.
“If buyers cancel simply because they got cold feet, but the only contingency left is the mortgage loan and they qualified to purchase the home, then it would be difficult for them to keep their deposit,” says Albert.
Backing out of escrow
Once a home sale has moved to the escrow phase — a few days before the closing, when closing statements have gone out — it can be more challenging for a prospective buyer to walk away from a sale. While a buyer can choose not to close, they’re more likely to face consequences for defaulting on the contract at such a late stage.
“If the buyer has no contingencies left to void the contract, and decides not to sign, the buyer is likely in default of the contract,” says Rodgers. “This could mean loss of deposit, but it could even go beyond that.”
However, if there’s still a contingency in the purchase and sale agreement that has not been met during escrow, it’s easier for a buyer to walk away from the sale.
Escrow can be canceled at any time during the transaction, up until all of the contingencies written into the offer have been met. Financing contingencies, appraisal contingencies, and home-to-sell contingencies are all reasons a buyer could receive their earnest deposit back during the escrow period.
Timing is crucial during this phase, though. Buyers must pay attention to the contingency deadlines written into the purchase agreement if they hope to avoid penalties.
“The buyer and their Realtor must be aware of when their inspection, financing and appraisal deadlines are slated to expire, and act accordingly with the proper documentation to formally cancel,” says Horner. “If the proper channels are followed and the buyer has not allowed any of their earnest funds to go nonrefundable, their earnest deposit would be returned back to them in full.”
Why do buyers back out?
There are two main reasons why a buyer will back out of a home purchase: because of issues that come to light during a home inspection, or because of financing issues.
Backing out due to the home inspection
A January 2022 survey by NAR found that 25 percent of terminated deals fell apart due to issues revealed during the home inspection.
Often, the “nitty-gritty of the house is unknown to a buyer until an inspection is done,” says Chase Michels, of the Michels Group at Compass in Hinsdale, Illinois. “If any major issues come up during the inspection that the buyer was not made aware of during the homebuying process, they can walk away clean from the contract and will receive their earnest money back.”
How common this is depends on the real estate market. When there is an especially competitive real estate market, it’s not unusual for buyers to waive contingencies altogether, including the inspection contingency. When there are more houses available for buyers to choose from, they are less likely to waive these contingencies.
Backing out due to financing problems
It’s also possible that a potential homebuyer can back out of a purchase because they run into issues securing financing or enough financing for the home. This is more common at times when mortgages are expensive.
This is the case during the closing months of 2022. At its December meeting, the Fed increased interest rates for the seventh straight time. It has been aggressively spiking rates in an effort to curb inflation, and the real estate market has suffered accordingly. Rising mortgage rates equate to less interest from home buyers and greater pressure on sellers to reduce their prices.
“The last few months of 2022 already reflect sales slowing, fewer people applying for mortgages and a larger percentage of people falling out of contract — meaning backing out of an executed contract to buy a property,” says Suzanne Hollander, a real estate attorney and professor at Florida International University in Miami. Per Redfin data, 60,000 deals were called off nationally in September 2022, representing 17 percent of the homes that went under contract that month.
Can sellers sue buyers for backing out?
The short answer is yes, a seller can hypothetically sue a buyer for backing out. But it depends heavily on the circumstances and reasons surrounding the contract termination.
“If all of the buyer’s legitimate deadlines have expired and the buyer is considered to be in default of the contract, the seller can elect to keep the earnest money as liquidated damages and agree to cancel the contract,” says Horner. “Or, the seller can elect to sue.”
Finding a new buyer
Having a backup offer waiting in the wings can soften the blow when a purchase deal falls through. A backup offer is one that’s negotiated between the buyer and the seller in advance, but is on standby, so to speak. It only becomes effective if the original deal falls through.
“Having a backup offer in place may help the home seller feel more at ease, knowing that they not only have one offer, but two,” says Horner.
The backup buyer might step into first position automatically if the first deal falls apart, or be subject to further negotiation, depending on state law and how the backup offer is written.
Smart sellers keep their home as sale-ready as possible until all the contingencies are removed, in case even the backup deal falls through. “I had a listing go through three buyers before it closed,” says Albert. “One got cold feet and the other decided to buy in a different area.”
When a home goes back on the market
Buyers back out of contracts for all sorts of reasons, often through no fault of the seller. If there is no backup buyer in place, the property will likely be relisted. Relisted homes may be denoted as “back on the market,” sometimes abbreviated BOM or BOMK in the MLS.
Relisted homes can suffer from a stigma, even if the buyer’s decision to walk away wasn’t related to the home itself. But an experienced agent will know how to navigate this hurdle. “It’s the listing agent’s job to make it known to any potential buyers that the home being relisted was not due to any defects with the property,” says Michels.
Flipping the listing to active again and garnering a new buyer is all part of the sales process, says Horner. “All Realtors hope the deal will remain together until closing,” she says. “But cancellations do occur, and it is the Realtor’s job to consult with their sellers and be by their side through the ups and the downs of the home sale process.”